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  • Jennifer M Mueller-Phillips
    Group judgment and decision making in auditing: Past and...
    research summary posted February 17, 2016 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.09 Group Decision-Making, 09.0 Auditor Judgment, 09.09 Impact of Consultation on Judgments, 09.11 Auditor judgment in the workpaper review process in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Group judgment and decision making in auditing: Past and future research.
    Practical Implications:

    The insights highlighted in this paper from research on audit groups/teams inform one’s understanding of how best to design group interactions between auditors within the firm and with professionals outside the audit firm, including management, audit committees, and inspectors. These insights are important given the criticism audit firms have faced from regulators and inspectors over the past decade and the multi-person setting present in auditing. Further, while a large literature exists on single-person decision-making, these studies may not generalize to multi-person settings. The review also highlights the need for continued research in this area and the importance audit practitioner involvement with future research efforts.

    Citation:

    Trotman, K., T. Bauer, and K. Humphreys. 2015. Group judgment and decision making in auditing: Past and future research. Accounting, Organizations and Society 47: 56-72.

    Keywords:
    Review process, brainstorming, consultation
    Purpose of the Study:

    This paper examines experimental research on audit groups/teams. The paper focuses on three main areas: 1) the hierarchical review process, 2) brainstorming as part of the fraud detection planning process, and 3) consultation within firms. The authors define research on audit groups/team as those papers where two or more individuals within the audit firm interact with one another face-to-face, electronically, or where on person prepares/reviews working papers for another. In addition to summarizing research to date in each of the three areas, the authors suggest directions for future research within the three areas as well as future research on within-firm group interactions. These areas include shared mental models, audit team diversity, and interactions with groups outside the audit firm, such as audit committees.

    Design/Method/ Approach:

    The paper summarizes research on group audit JDM experimental studies published in Accounting, Organizations, and SocietyContemporary Accounting ResearchJournal of Accounting Research, and The Accounting Review from 1970 through 2015. Relevant working papers are also discussed.

    Findings:

    Note: Given the breadth of this review paper, only select subsections are summarized below.

    • Hierarchical review process:
      • What performance gains result from the review process?
        • The review process generally improves audit effectiveness.
        • However, it is not always effective as biases may not be mitigated by the review process, such as the recency effect.
      • Alternative forms of the review process: Includes research on comparing reviews with and without discussion, specialized versus all-encompassing reviews, and electronic versus face-to-face reviews.
      • Effects of the preparer on the review process:  
        • Studies investigate the attributes of the preparer and the effects of preparer stylization on the review process.  
        • Overall, preparer attributes and stylization have a significant impact on the review process.
    • Brainstorming:
      • Face-to-face interacting versus nominal brainstorming: Nominal groups generate more unique ideas than face-to-face interacting groups, due to process losses (e.g., production blocking) occurring in the face-to-face interacting context.
      • Interacting face-to-face brainstorming compared to alternate brainstorming formats: While unstructured face-to-face brainstorming is the most common method used by audit firms, other methods (e.g., providing guidelines or instructions) outperform this unstructured method with respect to the quantity of fraud risks identified and fraud hypotheses generated.
      • Electronic brainstorming:  
        • Positive consequences of electronic brainstorming include minimizing production blocking and evaluation apprehension, however social loafing is a potential negative consequence.
        • Evidence supports the claim that electronic brainstorming is superior to face-to-face interaction, however as with non-electronic brainstorming, nominal electronic brainstorming outperforms interacting electronic brainstorming.
    • Consultation within firms:
      • Willingness to follow consulting advice: Auditors tend to incorporate advice received, however receiving advice can increase the tendency to follow aggressive client preferences.
      • Willingness to seek consulting advice: In general, auditors are more likely and willing to consult when related risk is high.
    Category:
    Audit Team Composition, Auditor Judgment
    Sub-category:
    Auditor judgment in the workpaper review process, Group Decision-Making, Impact of Consultation on Judgments
  • Jennifer M Mueller-Phillips
    Audit team time reporting: An agency theory perspective
    research summary posted October 21, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.06 Working Paper Review – Conduct, Biases and Predispositions in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Audit team time reporting: An agency theory perspective
    Practical Implications:

    The findings show that managers implicitly encourage auditors to underreport time when dealing with a favorable client. While CPA firms have decreased explicit incentives to underreport, these implicit incentives makes it likely that seniors are underreporting their time. This can lead to unrealistic budgets and possible costing issues for firms. Also, if a senior does not underreport they could risk getting a bad evaluation or not be assigned to desirable future engagements. These situations could lead to a reduction in raises, promotions, and continued employment.

    Citation:

    Agoglia, C. P., R. C. Hatfield, and T. A. Lambert. 2015. Audit team time reporting: An agency theory perspective. Accounting, Organizations and Society 44: 1-14.

    Keywords:
    auditor judgement, audit quality, workpaper review, underreporting
    Purpose of the Study:

    There is a substantial concern that audit teams underreport time for audit engagements. While some recent research suggests that explicit incentives to underreport have been reduced, other research suggests that there still may be implicit incentives to underreport. Based on agency theory, it is likely that reviewers rate the preparer more favorably when the client is desirable and the preparer underreported their time. The purpose of this study is to investigate this concern by evaluating how reviewer’s performance evaluations of the preparer and future staffing decisions are influenced by the following factors:

    • Desirability of the client
    • Whether the preparer underreported or reported accurately.
    Design/Method/ Approach:

    Data for this paper was collected prior to May 2015 by mailing experimental instruments to both managers and partners of CPA firms.  

    Findings:

    Managers rated the performance of a senior higher when they underreported time and were working on a desirable client. The findings also show that managers are more likely to request an underreporting senior on a future audit engagement. However, partners did not show any preference to seniors who underreported time.

    Category:
    Audit Quality & Quality Control, Auditor Judgment
    Sub-category:
    Auditor judgment in the workpaper review process, Working Paper Review – Conduct - Biases & Predispositions
  • Jennifer M Mueller-Phillips
    Does the Arrangement of Audit Evidence According to Causal...
    research summary posted October 19, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.06 Working Paper Review – Conduct, Biases and Predispositions in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Does the Arrangement of Audit Evidence According to Causal Connections Make Auditors More Susceptible to Memory Conjunction Errors?
    Practical Implications:

    Evaluating multiple causally arranged evidence sets may precipitate an auditor’s inability to accurately discern the source that pertains to specific information. Susceptibility to source misattributions may cause auditors to inadvertently evoke erroneous client information when rendering memory-based auditing judgments for a client and, therefore, create the potential for impaired judgment quality. Although working papers can serve to curtail informational misattributions, such as those created by MCEs, auditors can become overconfident in the accuracy of their memories and not thoroughly reexamine the working papers for verification. Subsequent to rendering an auditing decision, auditors concurrently working on multiple clients should consider reducing reliance on memory and tailoring working paper review to ensure the relationship between a decision for a certain client and its evidence.

    Citation:

    Grossman, A. M., and R. B. Welker. 2011. Does the Arrangement of Audit Evidence According to Causal Connections Make Auditors More Susceptible to Memory Conjunction Errors? Behavioral Research in Accounting 23 (2): 93-115.

    Keywords:
    auditing, evidence arrangements, going concern judgments, memory conjunction errors, schematic representations
    Purpose of the Study:

    Accounting firms traditionally arrange working paper evidence in accordance with audit planning procedures or in such a way as to facilitate the preparation of the financial statements. Causally connected pieces of evidence can be widely interspersed within these organizational arrangements. For example, a client’s financial ratios may be grouped together to facilitate the performance of preliminary analytical procedures; however, different ratios may correspond to different business processes within the company. The interspersion of causally connected evidence can complicate the task of extracting pertinent causal relationships for audit decision making.

    Considering the potential for auditors’ susceptibility to memory conjunction errors (MCEs), and their potential effect on auditor judgment, it is important to discover under what circumstances auditors’ propensity toward MCEs is exacerbated. The present study demonstrates that audit evidence organized in a causally relevant arrangement can increase auditors’ susceptibility to MCEs. When evidence is arranged in a causally relevant manner, as opposed to a traditional working paper format (i.e., grouped by accounting cycles), deficiencies in encoding from use of schemata may impede later retrieval of specific items of evidence associated with the source client. Causally arranged evidence may cause auditors to draw incorrect inferences that schematic-consistent pieces of evidence that actually originated from other clients were part of the evidence set of the source client.

    Design/Method/ Approach:

    Experimental participants were 72 auditors or former auditors. They had an average age of 38 years, an average of 9.8 years of auditing experience, and an average of 7.1 years of supervisory experience. Sixty-four percent were male, 51 percent had achieved manager or partner positions, and 58 percent currently held an auditing position. The experiment involved a 4 x 2 design and included three phases. The evidence was gathered November 2011.

    Findings:

    The results of this study do not refute the benefits of causally arranged evidence on judgment quality; however, they do suggest that evidence so arranged may elicit a potentially detrimental effect on judgment quality, particularly for practitioners simultaneously conducting multiple audits. Specifically, the results of this study indicate that arranging audit information according to causal connections, as opposed to a more traditional working paper arrangement of information (grouped by market/industry background, auditing procedures, and current-year activity), fosters an increased propensity toward MCEs. Causal ordering of information may allow auditors to decrease the amount of cognitive effort involved in determining relationships among information items, but it may also create a shallower encoding of the individual evidence items and weaker linkages in memory between the evidence items and the client source of the evidence. With weak memory of evidence specifics, auditors may gauge whether they recognize evidence on the basis of its familiarity with storylines extracted from previously encountered evidentiary matter. Causal connectivity between the evidence and a client’s storyline may produce feelings of familiarity and lead auditors to attribute the evidence to that client rather than to the actual source client.

    Category:
    Audit Quality & Quality Control, Auditor Judgment
    Sub-category:
    Auditor judgment in the workpaper review process, Working Paper Review – Conduct - Biases & Predispositions
  • Jennifer M Mueller-Phillips
    How Audit Reviewers Respond to an Audit Preparer's...
    research summary posted July 23, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    How Audit Reviewers Respond to an Audit Preparer's Affective Bias: The Ironic Rebound Effect.
    Practical Implications:

    These findings extend the audit review process literature by highlighting that reviewers might not always mitigate biases in preparers’ judgments, particularly in cases where they cannot readily determine how much the bias influenced the preparer’s judgment. Reviewers may be inappropriately influenced by the preparer’s judgment. Audit firms should be interested in these findings because they view the review process as a key quality control mechanism. If reviewers rely too heavily on a preparer’s biased judgment, then they inadvertently increase the firm’s audit risk. Identifying this potential limitation of the review process is a necessary first step in helping reviewers respond more appropriately when they believe it is likely that a preparer’s judgment is biased.

    Citation:

    Frank, M. L., & Hoffman, V. B. 2015. How Audit Reviewers Respond to an Audit Preparer's Affective Bias: The Ironic Rebound Effect. Accounting Review 90 (2): 559-577.

    Keywords:
    affect, audit review process, bias, ironic rebound effect, auditor judgment
    Purpose of the Study:

    Significant amount of research suggests that audit seniors’ (i.e., preparers’) judgments may be biased by factors such as their affect toward client personnel. However, research has not examined whether the audit review process corrects for this type of bias in preparer judgments. To address this issue, this study examines how experienced audit managers (i.e., reviewers) respond when reviewing an audit preparer’s judgment that they suspect could be biased by affect. Specifically, the authors investigate whether reviewers are able to rely less on a potentially biased preparer judgment. If reviewers rely too heavily on preparers’ judgments that are overly influenced by affect, then audit quality could be reduced.

    For example, assume that a preparer’s feelings of personally liking client personnel (i.e., positive affect) result in the preparer reaching a judgment that is overly favorable to the client. If reviewers are inappropriately influenced by the preparer’s judgment, then they may overlook a serious problem in the client’s financial statements. Similarly, if a preparer’s feeling of disliking client personnel (i.e., negative affect) causes the preparer to reach a judgment that is overly critical, and if reviewers are inappropriately influenced by the preparer’s biased judgment, then reviewers may require unnecessary costly audit procedures. Thus, over-relying on a preparer’s judgment that has been biased by affect could undermine the efficiency and effectiveness of the audit review process, resulting in significant costs to the audit firm.

    Design/Method/ Approach:

    Participants were 119 audit managers and senior managers with an average of 9.37 years of audit experience recruited from two Big 4 accounting firms. The study was conducted online. Using a 2x2 between-subjects design, participants were told to assume the role of an audit manager assigned the task of reviewing certain inventory judgments made by a hypothetical audit senior. The evidence was collected prior to February 2012.

    Findings:

    Reviewers who are not informed about the preparer’s affect are not significantly influenced by the preparer’s judgment and arrive at judgments more consistent with the audit evidence. In contrast, reviewers who not only receive the same preparer judgment and workpaper evidence, but who are also informed of the preparer’s affect, are significantly influenced by the preparer’s judgment. The results suggest that reviewers can better adjust for a preparer’s judgment that is simply inconsistent with the audit evidence than one that appears biased by the preparer’s affect.

    In a follow-up study the authors found that reviewers indeed believe that a preparer’s positive (negative) affect toward the controller will cause the preparer’s judgment to be more favorable (unfavorable) to the client than is warranted. Thus, despite their belief that affect biases the preparer’s judgment, reviewers fail to mitigate this bias when reaching their own judgments.

    Category:
    Auditor Judgment
    Sub-category:
    Auditor judgment in the workpaper review process
  • Jennifer M Mueller-Phillips
    The Auditors’ Approach to Subsequent Events: Insights from t...
    research summary posted February 19, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.09 Evaluation of Evidence in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Auditors’ Approach to Subsequent Events: Insights from the Academic Literature
    Practical Implications:

    A concern noted by the authors is the inherent complexity associated with the search for and evaluation of SEs arising from the seemingly boundless universe of potential SEs and the continuous nature of the search. Auditors’ SE procedures may be more effective if the universe of SE possibilities was better understood. One way to understand this universe is to identify undiscovered or incorrectly resolved SEs. Doing this might make these issues more salient to auditors and mitigate judgment biases in the search and evaluation of SEs. Further, auditors would be better equipped to consider potential SEs earlier in the audit if the consideration of potential SEs were incorporated into the risk assessment process during audit planning. This ensures that SE risks are given more detailed attention in the audit program.

    For more information on this study, please contact Janne Chung.

    Citation:

    Chung, J. O. Y., C. Cullinan, M. Frank, J. Long, J. Mueller, and D. O’Reilly. 2013. The Auditors’ Approach to Subsequent Events: Insights from the Academic Literature. Auditing: A Journal of Practice and Theory 32 (Supplement 1): 167-207.

    Keywords:
    Contextual factors, cognitive processing strategies, heuristics and biases, subsequent events judgment process.
    Purpose of the Study:

    Approximately one-third of the PCAOB’s inspection reports and several SEC enforcement releases identify deficiencies in the audit of subsequent events (SEs). Despite these issues, little research has been conducted to understand how and why these deficiencies occur. This paper integrates the psychology and behavioral accounting and auditing literatures to develop a model of the factors that influence the effectiveness of SE audit procedures. The model suggests that the effectiveness of these procedures is largely influenced by the auditor’s cognitive processing mode, which is initially affected by environmental, individual and task specific factors. The model provides a theoretical basis for future research into the causes of these deficiencies and suggests potential mitigating strategies that auditors can employ to improve the effectiveness of the audit of SEs. Suggestions for improving the audit of SEs include improved training for auditors in understanding the nature and frequency of SEs, incorporating the consideration of potential SEs into the risk assessment process during audit planning, employing brainstorming sessions to develop a priori expectations about SEs, and assigning both the SE search and evaluation steps to more experienced auditors.

    Design/Method/ Approach:

    The research was based on professional guidance and academic literature as of 2012. . First, the authors searched and summarized PCAOB’s inspection reports and SEC enforcement releases to identify deficiencies in the audit of SEs. Second, the authors developed a model of the factors that influence the effectiveness of SE audit procedures by searching and integrating the psychology and behavioral accounting and auditing literatures. Third, the authors propose research questions to guide future research in this area.

    Findings:

    •The authors find that approximately one-third of PCAOB’s inspection reports and several SEC enforcement releases identify deficiencies in the audit of SEs.

    •These reports and releases show a propensity toward Type I SE errors, the failure to evaluate SEs adequately, and a tendency for SE errors to be concentrated on certain accounts (including accounts receivable and current liabilities).

    Category:
    Audit Quality & Quality Control, Auditor Judgment
    Sub-category:
    Auditor judgment in the workpaper review process, Evaluation of Evidence
  • Jennifer M Mueller-Phillips
    The Audit of Fair Values and Other Estimates: The Effects of...
    research summary posted November 10, 2014 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.09 Impact of Consultation on Judgments, 09.11 Auditor judgment in the workpaper review process in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Audit of Fair Values and Other Estimates: The Effects of Underlying Environmental, Task, and Auditor-Specific Factors
    Practical Implications:

    The paper gives practitioners, policy makers, and researchers a framework for considering audit of FVOEs. In considering environmental, task, and auditor-specific factors that individually and interactively affect auditors’ judgments, one may better analyze observed practice deficiencies and contribute to practitioners’ and regulators’ understanding of their likely causes and potential remedies.

    The framework is also valuable in identifying and evaluating the merit of future research topics. Central to the goal of developing research that will improve audits of FVOEs is the deliberate consideration of important interactions among the environmental, task, and person-specific factors involved in the development and audit of FVOEs. Identifying the important interactions among these factors allows researchers to better design studies that evaluate ways to improve the quality of audited FVOEs. Conducting practice-relevant research within the three-factor framework will help researchers, practitioners, and regulators better communicate their perspectives on issues surrounding audits of FVOEs.

    For more information on this study, please contact Gregory E. Sierra.

    Citation:

    Bratten, B., L. M. Gaynor, L. McDaniel, N. R. Montague & G. E. Sierra. 2013. The audit of fair values and other estimates: The effects of underlying environmental, task, and auditor-specific factors. Auditing: A Journal of Practice and Theory 32(Supplement 1): 7-44.

    Keywords:
    fair value, estimates, audit judgment, audit deficiencies.
    Purpose of the Study:

    Based on inspections that report numerous deficiencies, the PCAOB has been concerned that auditors are not sufficiently prepared for the challenges faced in evaluating fair value and other estimates (FVOEs). The authors’ purpose is to organize the discussion on the sources of audit deficiencies related to FVOEs. First, the authors use the theoretical framework established by Bonner (2008)[1] to organize the challenges of auditing FVOEs in practice. The framework examines auditor judgment through an analysis of three critical and interactive factors of the judgment process—the environment, the task, and the person. Second, with consideration of the PCAOB-identified practice areas with direct implications for the audits of FVOEs, the authors develop and present future research lines of inquiry. The research lines of inquiry take into account the important interactions among the three framework factors, as they believe empirical evidence within these lines will help identify potential sources of, and remedies for, observed audit deficiencies.

     

    [1] Bonner, S. E. 2008. Judgment and Decision Making in Accounting. Upper Saddle River, NJ: Pearson Prentice Hall.

    Design/Method/ Approach:

    The authors analyze the possible sources for observed practice deficiencies by evaluating extant archival and experimental research and organize the discussion of FVOE audit around the Bonner (2008) three-factor judgment framework, which includes the environment, the task, and the person. The authors place the research in the context of the three factors (environment, task, and person) and their interactions. No data is tested. However, the authors do note that 42 percent of the deficiencies in the PCAOB’s August and September 2011 inspection reports are related to FVOEs.

    Findings:

    Regulators have attributed auditor characteristics, such as lack of valuation knowledge and lack of professional skepticism, to observed audit deficiencies. However, the authors’ evaluation of the literature within the three-factor framework demonstrates that not only are environmental uncertainties important but complexities in the task of auditing FVOEs are also important to consider in understanding auditor judgment. In short, whether auditor characteristics are the fundamental driver of audit deficiencies related to FVOEs is unclear. The authors also identify gaps in the research literature on audit of FVOEs and use the three-factor framework to organize research lines of inquiry. Given the paucity of research specifically targeted toward the audits of FVOEs, the authors identify 11 specific, empirical research lines of inquiry focused on  understanding the possible underlying sources of PCAOB-observed audit deficiencies. These suggestions for future research address unanswered questions that would benefit practice.  

    Category:
    Auditor Judgment
    Sub-category:
    Impact of Consultation on Judgments, Prior Dispositions/Biases/Auditor state of mind
  • The Auditing Section
    Analysis of Diagnostic Tasks in Accounting Research Using...
    research summary posted May 9, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Analysis of Diagnostic Tasks in Accounting Research Using Signal Detection Theory
    Practical Implications:

    The results of this study provide insights into the decision-making process of auditors.  It suggests that accountants’ decisions may reflect an unconscious bias based on the potential cost or impact of the decision. The study provides information regarding  assignment of workpaper review responsibilities.  Managers have greater accuracy than seniors in detecting conceptual errors, but are equally accurate in detecting mechanical errors. 

    The study also provides information regarding the efficacy of audit committees.  Auditors are better able to discriminate between bankrupt and nonbankrupt companies when the audit committee consists of independent directors. 

    Citation:

    Ramsay, R. J. and R. M. Tubbs. 2005. Analysis of diagnostic tasks in accounting research using signal detection theory. Behavioral Research in Accounting 17 (1): 149-173.

    Keywords:
    Diagnostic tasks, signal detection theory, accuracy, response bias, confidence, auditor judgment
    Purpose of the Study:

    Many accounting judgments are diagnostic tasks in which accountants, auditors, managers, or investors discriminate among possible states and decide which one exists.   When evaluating decisions, we often assess the accuracy of a decision by asking the question “Did the accountant make the correct decision?”  Signal Detection Theory provides an alternative way to evaluate decisions that recognizes that decisions are made in the presence of uncertainty.  A task can involve two independent cognitive processes:  discrimination (the capability of recognizing the discriminating stimuli) and decision (the effect of decision factors).  An individual must first determine whether a signal is present (e.g., signal or noise) and then determine whether or not to report the factor as present (e.g., yes or no).  Many accounting decisions (e.g., bankruptcy, material misstatement, fraud) involve this two-step process where an individual must make a determination about how strong the evidence is before responding.  The authors of this paper utilize Signal Detection Theory to re-evaluate two previous studies to determine if this new technique allows existing researchers to draw updated conclusions about previous research. The methods and measures used by Signal Detection Theory have been widely adopted in studies of a variety of diagnostic tasks (e.g., information retrieval, weather forecasting, medical diagnosis, recognition memory, aptitude testing, and polygraph lie detection).  The purpose of this study is to provide evidence that Signal Detection Theory offers  valuable information into the decision-making process of accountants as well.

    Design/Method/ Approach:

    The authors re-examine data from two existing studies using the measures and methods of Signal Detection Theory.  The first study (Ramsay, R. J. Senior/Manager Differences in Audit Review Performance.  Journal of Accounting Research 32 (1): 127-135.)  conducted pre-1994, asked auditors (seniors and managers) from an international accounting firm to review a set of simulated working papers to determine if working paper errors existed.  As originally published, the study found senior auditors were more likely to find mechanical (objective, concrete, and verifiable) errors such as an account balance not agreeing with the workpapers. The original study also found that managers were more likely to find conceptual (subjective, unverifiable, and imprecise) errors such as an inadequate level of support for a particular account balance. 

    The authors also re-evaluate data from a study) conducted on public companies (excluding financial institutions) experiencing financial distress during 1994 (Carcello, J. V. and T. L. Neal. Audit Committee Composition and Auditor Reporting.  The Accounting Review 75 (4): 453-467).  As originally published, the study found auditors are more likely to issue a going-concern opinion for firms with independent audit committees than for firms with affiliated audit committees which include members of management or gray directors (i.e., former employees, relatives of management, or others with significant business relationships with the company).

    Findings:

    After applying Signal Detection Theory, the authors were able to gather additional insight from the original data. 

    Ramsay (1994)

    • Auditors exhibited greater bias toward saying “yes” (i.e., “error is present”) for conceptual errors which the authors believe is reasonable since the cost of missing a conceptual error is likely to be higher than the cost of missing a mechanical error. 
    • Auditors also exhibited greater confidence in their assessment of conceptual errors, which the authors theorize is due to the greater amount of time spent reviewing conceptual errors. 
    •  Original conclusions from the study were modified.  While managers had greater accuracy (of moderate significance) in assessing conceptual errors, there was no difference in the accuracy of assessing mechanical errors based on level of experience. 

    Carcello and Neal (2000)

    • Consistent with original findings, the authors find auditors are biased toward issuing a going concern opinion for firms with independent audit committees.  Auditors of firms with independent audit committees are better able to discriminate between bankrupt and nonbankrupt companies.  However, the cause of this finding is worthy of future investigation.
    Category:
    Auditor Judgment
    Sub-category:
    Auditor judgment in the workpaper review process
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  • The Auditing Section
    Effects of Discussion of Audit Reviews on Auditors’ M...
    research summary posted May 9, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.06 Working Paper Review – Conduct, Biases and Predispositions in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Effects of Discussion of Audit Reviews on Auditors’ Motivation and Performance
    Practical Implications:

    The results of this study are useful for understanding the conditions under which a discussion accompanied review is worthwhile and when it is ineffective. The results of this study imply that different review processes may be better for evaluating auditor performance at different experience levels. This finding is in line with prior literature that finds that different feedback methods may be required at different levels of experience to achieve increased performance. The results of this study suggest that firms should consider  implementing discussion as a part of the review process for inexperienced auditors but not for more experienced auditors.  

    Citation:

    Miller, C.L., D. B. Fedor and R. J. Ramsay. 2006. Effects of Discussion of Audit Reviews on Auditors’ Motivation and Performance. Behavioral Research in Accounting 18: 135-146.

    Keywords:
    audit, review, discussion, experience, feedback, motivation, performance
    Purpose of the Study:

    Some firms have moved to include discussion of performance and audit findings as part of the review process, a procedure sometimes referred to as “review by interview” or as “coaching.” Practitioners have indicated that discussion-enhanced reviews can take various forms, from real-time questioning while procedures are being performed, to an informal meeting between reviewer and preparer where written comments are read through and discussed. However, little is known about the effectiveness of this method which may prove to be unnecessarily costly if there are no apparent benefits to motivation or performance. Therefore, this paper examines whether adding verbal discussion to the traditional written audit review improves auditor motivation and/or performance.

    Design/Method/ Approach:

    The authors collected data from auditors locally employed by the (then) Big 6 accounting firms (suggesting that data was gathered sometime between 1989 and 1998). Participants included pairs of reviewers and preparers that had previously worked together on a recent audit engagement, resulting in a total of 154 matched sets. Participants were asked to refer to the previous audit engagement and answer questions about their experience with the review process on that engagement. For instance, preparers were asked about the extent to which they felt a conversation with the reviewer about their audit performance took place. They were also asked about their experience and their motivation to improve their performance. Reviewers, on the other hand, were asked about their perception of the preparer’s actual improvement.

    Findings:
    • The authors find that incorporating discussion of performance with written review notes does enhance preparers’ motivation to improve performance; however, more experienced preparers are less likely to be motivated by the review.
    • The authors find that when discussion is incorporated in the review, reviewers perceive actual performance to improve for less experienced auditors but diminish for more experienced preparers.
    • Motivation does not appear to have a significant effect on performance.
    Category:
    Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Auditor judgment in the workpaper review process, Working Paper Review – Conduct - Biases & Predispositions
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  • The Auditing Section
    The Effects of Client and Preparer Risk Factors on Workpaper...
    research summary posted May 9, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.06 Working Paper Review – Conduct, Biases and Predispositions in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Effects of Client and Preparer Risk Factors on Workpaper Review Effectiveness
    Practical Implications:

    The results suggest that although preparer risk is not a driver of review effort, it nevertheless can affect accuracy when client risk is high. The results of this study are useful for understanding how client risk and preparer risk interact to influence workpaper review effort and accuracy. Overall, it appears that reviewers expect highly competent preparers to identify and correct errors. Accordingly, reviewers tend to rely on the work of a competent preparer and allow low preparer risk to compensate for high client risk. The authors note that although this is an efficient strategy, it can adversely affect the reviewer’s effectiveness by reducing the accuracy with which they identify errors.

    Citation:

    Asare, S. K., C. M. Haynes and J. G. Jenkins. 2007. The Effects of Client and Preparer Risk Factors on Workpaper Review Effectiveness. Behavioral Research in Accounting 19 (1): 1-17.

    Keywords:
    workpaper review, client engagement risk, workpaper preparer risk, review effort, review accuracy
    Purpose of the Study:

    When reviewing workpapers, auditors must accept some degree of risk. This risk is composed of (1) client risk and (2) preparer risk. Client risk refers to the risk that the information provided by the client is materially misstated and preparer risk refers to the risk that the workpaper preparer failed to identify, investigate and/or resolve existing material misstatements. The purpose of this study is to examine how combined client risk and preparer risk affect the effort and accuracy of the workpaper reviewer.

    Design/Method/ Approach:

    Fifty-three experienced auditors reviewed an actual set of audit workpapers which were originally prepared and reviewed by a Big 4 accounting firm. The workpapers related to the sales and collection cycle and contained one uncorrected revenue recognition error and ten seeded mechanical errors.

    Participants were asked to assume the role of in-charge auditor and instructed to review the workpapers. They were also provided with information about whether client risk was high (e.g., “Management’s accounting policies and estimates are aggressive”) or low (e.g., “Management’s accounting policies and estimates are conservative”) and information about whether preparer risk was high (e.g., “Jane’s ranking among staff accountants in your office is in the 50th percentile”) or low (e.g., Jane’s ranking among staff accountants in your office is in the top 5 percent”).

    After reviewing the workpapers, participants were asked whether they agreed or disagreed with the preparer’s conclusions. Their effort was measured by the amount of time they spent reviewing the workpapers and their accuracy was measured by the number of errors that they correctly identified.

    Findings:
    • The authors find that reviewers expended more effort during their review when reviewing workpapers of a high-risk client, relative to a low risk client. However, the preparer risk did not make a difference in the amount of effort exerted.
    • The authors also find that reviewers were more accurate in their review (i.e. correctly identified more errors) when both client risk and preparer risk were high. However, the preparer risk did not make a difference in accuracy when the client risk was low.
    Category:
    Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Auditor judgment in the workpaper review process, Working Paper Review – Conduct - Biases & Predispositions
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  • The Auditing Section
    Effects of Supervisor Power on Preparers’ Responses to A...
    research summary posted May 7, 2012 by The Auditing Section, tagged 09.0 Auditor Judgment, 09.11 Auditor judgment in the workpaper review process, 11.0 Audit Quality and Quality Control, 11.06 Working Paper Review – Conduct, Biases and Predispositions in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Effects of Supervisor Power on Preparers’ Responses to Audit Review: A Field Study
    Practical Implications:

    The results of this study are important for firms to consider as they show that preparer’s perceptions of reviewers impact the preparer’s response to review notes. Audit firms should try to help their supervisors understand what they can do to exude more referent or expert power and less coercive power. Further, firms should allow subordinates to provide feedback to supervisors in order for them to understand how they are being perceived so they can take the necessary steps to alter the perception. 

    Citation:

    Fedor, D. B. and Ramsay, R. J. 2007. Effects of Supervisor Power on Preparers' Responses to Audit Review: A Field Study. Behavioral Research in Accounting 19 (1): 91-105.

    Keywords:
    audit review, feedback, power, experience
    Purpose of the Study:

    The audit review process has three primary purposes, controlling the quality of work, ensuring the appropriate conclusions are reached, and allowing for formal structured interaction between team members. Providing corrective feedback to employees is a very important part of the review process and allows for employees to be informed on how their performance stands in relation to productivity and quality standards. The purpose of this study is to understand how recipients respond to the corrective feedback.  The auditor being reviewed is expected to respond differently based on their perception of the source of a reviewer’s influence (i.e. social power).  Reviewers can possess three different types of social power:

    • Referent: reviewer’s influence is based on personal acceptance or approval
    • Expert:  reviewer’s influence is based on their knowledge or expertise
    • Coercive: reviewer’s influence is based on the ability to punish or reward the reviewee

    Preparers can respond in three ways:

    • Performance improvement: improve knowledge or increase motivation
    • Feedback seeking: follow up on review points they do not understand
    • Impression management: responding in ways intended to improve the reviewer’s impression of them rather than the actual quality of work           

    The authors motivate their expectations based on the characteristics of the three dimensions of power. Referent power is positively related to organizational outcomes, people like spending time with referent people; they are easily approachable, and perceived as important. Therefore, referent power should have a positive relationship with all three responses. Expert power is also positively associated with organizational outcomes; experts are seen as possessing valuable and useful information, and others want to stay in their “good graces”. Therefore, Expert power should have a positive relationship with all three responses. Coercive power is negatively related to organizational outcomes and results in avoidance in order to stay out of harm’s way. Therefore, Coercive power is predicted to have negative relationships with all responses.

    Design/Method/ Approach:

    Data was collected prior to 2006 from subordinate auditors in the big six accounting firms. Respondents had 4 to 108 months of audit experience (average of 22 months). A ten page survey was filled out based on a specific recent performance review selected by each participant. Participants responded to a number of questions using a scale from 1 to 7.

    Findings:
    • Referent power has a positive relationship with performance improvement, feedback seeking, and impression management
    • Expert power has a positive relationship with feedback seeking
    • Coercive power has a negative relationship with performance improvement and feedback seeking
    • When a reviewer is seen as coercive, the negative relationship between coercive power ad performance improvement is much stronger when the reviewer is not regarded as an expert than when the reviewer is regarded as an expert.
    Category:
    Auditor Judgment, Audit Quality & Quality Control
    Sub-category:
    Auditor judgment in the workpaper review process, Working Paper Review – Conduct - Biases & Predispositions
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